Zumiez Inc. reported fourth-quarter earnings rose 18.2 percent but came in below guidance due to write-offs for its European operations.

In the quarter ended February 3, sales climbed 16.9 percent to $308.2 million. Comps increased 7.5 percent.

On a conference call with analysts, Christopher Work, CFO, said an increase in transaction volume–representing its sixth consecutive quarter of transaction gains–offset a decrease in dollars per transaction. The decrease in dollars per transaction resulted from lower units per transaction, partially offset by an increase in average unit retail. Among categories, men’s saw the largest positive comp in category, followed by women’s and footwear. Accessories was the largest negative comp in category followed by hardgoods.

From a regional perspective, North American net sales increased 16.2% to $265.6 million, while the international net sales, which consist of Europe and Australia, increased 21.7% to $42.6 million. Excluding the impact of foreign currency translations, North American net sales grew 15.8%, and other international net sales grew 9.2% for the quarter.

Gross margins improved 150 basis points to 37.2% in the quarter. The increase was primarily driven by 120 basis points of leverage in occupancy, 80 basis points related to the recognition of deferred revenue due to changes in its STASH loyalty program estimated redemption rate and 70 basis points of improvement in product margins. These increases were partially offset by 70 basis point increase in inventory shrinkage and 20 basis point increase in incentive compensation.

SG&A expense as a percentage of net sales was 25.2% compared to 25% in the prior year. The 20 basis point increase was primarily driven by an 100 basis point increase related to its annual incentive compensation, partially offset by 40 basis points of leverage in its store operating cost and 30 basis points of leverage across other corporate costs.

Net earnings improved 9.3 percent to $19.9 million, or 80 cents per share, coming in below guidance in the range of 88 cents to 90 cents provided on February 7.

Work said items unanticipated since the company provided guidance included the deferred revenue adjustment related to its STASH program, which was worth $3.8 million, or 10 cents per share. The U.S. Tax Reform benefited the quarter’s results by $0.5 million, or 2 cents.

Offsetting these items was 22 cents per share of headwinds, including a valuation allowance booked against certain deferred tax assets in Europe amounting to $3.4 million, or 14 cents a share. adjustments to inventory valuation expense accruals in Europe of 5 cents per share, and a $1.2 million of expense impact, or 3 cents per share, related to asset impairments.

Work said the company was hoping to break-even in Europe after making numerous investments in 2015 but “we’ve retreated backwards the last two years” due to sales shortfalls and increased costs.

Richard Brooks, CEO, said that 2015 saw a strong performance in the region due to a strong long-board trend but 2016 saw shortfalls amid heavy investments. But officials expect to see improvement.

“I believe in our team over there,” said Brooks. “I believe in our strategies. We’re going to execute a lot of the omnichannel initiatives you’ve seen us do here in the U.S. and Canada and we know that new markets take serious investment and that we need to give them the time to mature into those investments.”

Overall, Brooks said the quarter marked the company’s sixth consecutive quarter of meaningful positive comparable sales. Said Brooks, “Our topline results were stronger during the second half of the year despite tougher comparisons, as the work we’ve done to position the company for sustained growth continues to gain traction.”

In the year, sales increased 10.9 percent to $927.4 million. Comparable sales increased 5.9 percent. Earnings improved 3.5 percent to 26.8 million, or $1.08 per share. Excluding non-recurring items, earnings would have rose 5.4 percent to $27.3 million, or $1.06.

Brooks said Zumiez continues to benefit from its integrated sales channels and differentiated merchandising strategies. In 2017 Zumiez launched over 150 new brands, more than ever before and “are constantly driving for further improvement on this critical front.”

Brooks said Zumiez believes it is entering into a new phase in servicing its customer, moving beyond omnichannel into a new consumer environment with higher expectations. Said Brooks, “While we’re not sure what to call this new consumer phase; the New World will be characterized by key themes and words, such as trade area, localization, optimization, speed, intimacy, engagement, connection, innovation and community.”

“We have now established a new set of initiatives that will move us into this new consumer phase, which we’ll began executing in 2018 and evolve as we test and learn over the next three to five years. One thing that will remain constant among all this change in the consumer world is that underlying every aspect of what we do at Zumiez is our belief in the power of our culture and our brand position.

“Our brand guides us in all that we do to serve our customer, and our cultural values guide us in how we execute in service of our customer and in alignment with our brand. These beliefs are the primary reason that we’re excited about what the future holds for Zumiez. As the consumer world continues to rapidly evolve, we believe we are well-positioned to extend our lead in our lifestyle niche by creating unique customer experiences on a global scale.”

Zumiez said its sales for February increased 23.2 percent to $63.4 million and grew 9.2 percent on a comp basis.

For the first quarter, Zumiez expects net sales to be in the range of $198 million to $202 million, including anticipated comparable sales growth of between 4.0 percent and 6.0 percent. Consolidated operating margins are expected to be between negative 2.6 percent and negative 1.7 percent, resulting in a net loss per share of approximately 18 cents to 13 cents. The company lost 18 cents a share on sales of $181.2 million in the same quarter a year ago.

Zumiez currently intends to open approximately 13 new stores in fiscal 2018, including up to six stores in the United States, five stores in Europe and two stores in Australia.

Said Brooks, “While we are pleased with our recent top-line results, we believe the company is positioned to deliver accelerated earnings growth in 2018 through a combination of positive comparable sales, margin enhancement programs, improved expense leverage and lower taxes.”

Photo courtesy Zumiez